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Affinion Group Holdings: Debt For Equity Swap Agreed. Good News For PennantPark ?

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On March 18, 2018  Affinion Group announced noteholders agreed to swap $670mn of 2022 Notes with a coupon of 12.5%-15.5% for equity in Affinion Group Holdings. This was part of a complex restructuring plan for the Affinion Group – which included a rights offering  which was described in an earlier press release:

The purpose of the Recapitalization, including the Exchange Offer and the Rights Offering, is to deleverage the Company’s capital structure, improve its liquidity position and enable the Company to pursue its business strategy (including making continued investments in its core platform, content, delivery and analytics capabilities to support existing and future business opportunities).  Upon completion, the Recapitalization (assuming all of the Existing Notes are validly tendered) will result in the conversion of approximately $700 million principal amount of Existing Notes into equity, $288 million in aggregate gross cash proceeds from the Rights Offering, $12 million in aggregate gross cash proceeds from a concurrent rights offering on substantially the same terms as the Rights Offering, to eligible holders of 1% or more of the Company’s equity (together with the Rights Offering, the “Rights Offerings”), incremental liquidity through a fully available $85 million senior secured revolving credit facility and the extension of maturities of substantially all of the Company’s long-term debt.

No BDC appears to have held Affinion Group debt involved in the swap, according to Advantage Data records. However, both PennantPark BDCs : PennantPark Investment (PNNT) and PennantPark Floating Rate (PFLT) hold substantial equity positions – in absolute dollar terms – in Affinion Group Holdings already. Total exposure at cost at December 31, 2018 totaled $45.5mn at cost, divided two thirds one third. There appear to be two tranches of equity involved, one written down virtually to zero and the other by 45%. Total FMV adds up to just under $20mn. Both BDCs have been involved with Affinion for years and have held – and then sold – its debt in the past. We expect this recapitalization might dilute PNNT and PFLT’s equity stakes – even if the BDCs participated in the “concurrent rights offering” mentioned above. We will be curious, though, how the PennantPark equity stakes will be valued going forward now that Affinion Group has been  de-leveraged, covenants greatly loosened and additional liquidity injected. From a credit standpoint alone, this has to be positive as the prior debt was at an unsustainably high interest rate.

If you want further information on Affinion click here for its Wikipedia listing or here for its website.  The company has a controversial past and has been involved in restructurings and exchanges before. The IIIQ 2018 financial statements show a still very leveraged business. This latest re-organization could make a material difference to the company’s fortunes. Whether that will benefit PNNT and PFLT remains to be seen.

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